Environmental Engineering Reference
In-Depth Information
To be certain, there are limits to how far this dynamic can take things.
Most new U.S. oil is expensive to produce. If prices drop too far, U.S.
oil production will stagnate or even fall, reversing the stimulus that had
prompted lower prices in the i rst place. h is makes it tough to see how
rising U.S. crude production could drive world oil prices below i t y dollars
or so for more than a brief period of time. But that's still a staggeringly
dif erent number from the ones people have begun to get used to. So here's
the big question for anyone trying to divine the impact of rising U.S. oil
production on world prices: What sort of response will other oil produc-
ing countries mount, alone or collectively? Will some of them restrain
production and put a l oor on prices? Or will discipline break down and
result in a l ood of oil?
Two episodes from history can help us sort through the dif er-
ence. h e i rst is the late 1960s and early 1970s. Oil production out-
side OPEC is rising, but consumption is increasing even faster. West
Germany and Japan continue to grow as industrial powerhouses at er
the devastating experience of World War II; the United States and
the rest of Europe are increasingly thirsty for oil too. h e net result is
that OPEC has an ever larger pie to divide: its members can restrain
production and raise prices while still ensuring solid revenues for each.
And that's exactly what happens: OPEC output doesn't grow a lot, but
prices and incomes soar.
Fast-forward to the early 1980s. h e Iranian revolution of 1979
has spiked crude prices and crushed global oil demand. For the
i rst time in decades, in fact, consumption is falling year upon year.
Supply from outside OPEC, meanwhile, continues to rise. h e pie
let for OPEC members to divide is now shrinking. Tough collective
decisions are essential if prices are to stay high, but producers aren't
up to the task. Instead, OPEC members bat le each other for the
remaining scraps of an ever-smaller market. Prices drop to previously
unthinkable lows.
If you want to know whether OPEC countries will mul e or amplify
the impact of rising U.S. supplies, then you need to ask whether the
growth will be overwhelmed by even bigger increases in demand.
h
at's where China, India, and the rest of the developing world come
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